1. Suppose you short-sell a $100m 10-year on-the-run par treasury and buy an $100m 10-year off-the-run par treasury to earn the yield spread in late 1997. At the time, the rates on these bonds were 6.03% and 6.18%, respectively, a spread of 0.15%. In six months, suppose the off-the-run yield stays the same and the on-the-run bond is now off-the-run. What is your profit over this period of time?
2. The on- the-run treasury rate stays at 6.03% but immediately after you enter the strategy, the off-the-run spread jumps to 0.30%. What is the loss in market value of your position?
3. In the scenario in #2, suppose you were holding $1m as collateral with your prime broker. Losses in value of your position are taken from this. If the losses exceed this, you will get a call for the remainder of the loss plus enough to get back to $1m. If you can not meet this call right away, your position will get closed out. How much more collateral would you need to come up with in this example?